IMPACT OF CORONA VIRUS ON CONTRACT
COVID-19 has been declared a public health emergency of International Concern by the World Health Organization on January 30, 2020. Subsequently on 11th March 2020, COVID-19 has been assessed to be a pandemic by WHO. To curb the effects of the contagious virus, India has imposed a lockdown across the country. India has constrained the fundamental right to movement available to all the citizens under Article 19(1) (d) by imposing reasonable restrictions by virtue of Article 19(5).
The outbreak of the corona virus has social and economic impacts. The immediate results are supply-chain disruptions, unwanted delay in performance and carrying out of the contractual obligations. From construction contracts to manufacturing and supply agreements, the variety of contracts which are likely to be affected by the spread of COVID-19 is undoubtedly humongous. The paper intends to discuss about its impact on commercial contracts disrupting the performance of the contractual obligations.
Performance of the contractual obligations is the best way to discharge a contract. By default, the defaulting party has to pay damages to the aggrieved party for non-performance of the contract.
However, the defaulting party may be relived in certain situations where default has taken place due to some unavoidable circumstances beyond the control of the parties. The outbreak of the pandemic COVID-19 is such a situation where the parties can be exculpated from their contractual obligations either by including a contingent clause of Force Majeure by virtue of Section 32 of Indian Contract Act, 1872 or by virtue of Section 56 of the Indian Contract Act, 1872.
Force majeure clause encompassing a pandemic
The expression force majeure is borne out from the Code Napoleon and has a wider meaning than act of God. Force majeure, a French term which means superior force is a contractual clause which absolves a party from something it promised in a contract because of reasons beyond its control. Contracts encompassing such clause can be termed as a contingent contract by virtue of Section 32 of Indian Contract Act, 1872. There is a certain list of events which the Force Majeure clause can cover. What all events are covered by this clause depends on the negotiation done by the parties based on their contemplation abilities.
There are two types of Force Majeure events-
Natural Force Majeure events :-
Act of God, including, but not limited to lightning, drought, fire and explosion (to the extent originating from a source external to the Site), earthquake, volcanic eruption, landslide, food, cyclone, typhoon, tornado, or exceptionally adverse weather conditions which are in excess of the statistical measures for the last hundred (100) years.
Non-Natural Force Majeure events:-
Any act of war (whether declared or undeclared), invasion, armed conflict or act of foreign enemy, blockade, embargo, revolution, riot, insurrection, terrorist or military action; or Radioactive contamination or ionizing radiation originating from a source in India or resulting from another, lockouts, slowdowns, prolonged shortage of energy supplies, and acts of state or governmental action prohibiting or impeding any party from performing its respective obligations under the contract.
Effect of Force Majeure clause when invoked:-
● Relieves the party from performing the contractual obligation subsequent to the happening of such event, or
● Temporarily suspends the party from performing the contractual obligation until the situation prevalent due to the pandemic ceases to exist.
If Force Majeure clause encompasses the happening of the following events, the parties may be absolved from their liabilities due to non-performance of the contract because of the COVID-19 outbreak:
● Pandemic alike situation :- WHO has declared the corona virus disease as a pandemic.Even if a Force majeure clause lists act of god, a court may or may not agree that COVID-19 is a covered event; an Act of God alone may be too broad to excuse a party from performance.
● Governmental actions or actions taken by public authority:- Due to this outbreak, government has imposed a lockdown across the country, thereby has put a reasonable restriction on the fundamental right to movement. Also, Section 144 CrPC has been enforced in the country prohibiting public gathering.
E g:- If the contract requires supplies to be obtained from a high-risk area that is currently subject to shut-down or travel restrictions, and no alternatives are available, the requisite level of impact and causation are more likely to be met.
⮚ On the other hand, some contracts may even state that the duty to fulfill the contractual obligation may be suspended for a certain period of time and if the force majeure event is not curbed or treated even after such time, then eventually the contract may be terminated.
● In India, the nationwide lockdown has gravely affected businesses. Though there cannot be a one-size-fits-all solution to this question, and it depends upon how the force majeure clause is worded in a specific contract; and in the absence of the same, applicable laws related to the same will be required to be taken into consideration.
● The Indian Contract Act, 1872, despite being a rather old statute, contains specific provisions to combat situations of force majeure or similar circumstances. In this regard, reference can be made to Sections 32 (Enforcement of Contracts contingent on an event happening) and 56 (Agreement to do impossible act) of the Indian Contract Act 1872.
● As long as it is relatable to an express or implied clause in a contract, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 of the Indian Contract Act. In so far as a force majeure event occurs which are outside the scope of the contract, it is dealt with by a rule of positive law under Section 56 of the Indian Contract Act.
● The Supreme Court, way back in 1954 had adverted to Section 32 & 56 of the Indian Contract Act, in SatyabrataGhose v. Mugneeram Bangur& Co case, wherein it was held that the word "impossible" has not been used in the Section in the sense of physical or literal impossibility. However, certain exceptions have been carved into the applicability of force majeure by Indian Courts.
● More recently, after the break out of COVID-19, while reinforcing the settled position in law that letters of credit are independent transactions and the banks are not concerned with underlying disputes between the parties, the High Court of Bombay in its decision dated 8 April 2020, in the matter of Standard Retail Private Ltd Vs GS Corp & Others held that force majeure cannot be invoked by the purchaser in making payments when the seller has performed its part of the contract.
● Counterparties may argue that COVID-19 is a force majeure event that excludes them from their contractual obligations. However, the impact of the force majeure event cannot be generalised and shall vary depending on the nature of the transaction and its impact on the same.
● There exists a fine line of difference between cases of force majeure and those of hardship. In order to correctly identify an individual instance and its possible legal implications, therefore, it is necessary to undertake a case by case analysis.The Indian government and its organisations have recognised the event of COVID-19 as a force majeure and have taken possible steps to ensure the minimum possible hardships to the common people.
⮚ The Finance Ministry had on February 19, 2020, clarified that the meaning of force majeure shall include the present pandemic as a case of natural calamity and hence if the contract mentions natural calamity in the force majeure clause then non-performance of contract can be exercised by the contracting parties stating COVID-19 as a force majeure event. Even the courts and judicial forums have been constrained to either completely close their operations during the lockdown in India or are operating on an extremely limited scale via video conferencing, exclusively for extraordinarily urgent matters. This is also why the Supreme Court (SC) thought it was advisable to notify an extension of the statutory period of limitation for approaching courts to protect litigants from the technical difficulty of time bar. Additionally, the High Courts notified the extension of interim orders for this period of lockdown.
● Various ministries and government authorities including the Ministry of Corporate Affairs, Ministry of Finance, Department of direct and indirect Tax have also notified extension for mandatory compliances.
Non-performing parties may seek to rely on contractual force majeure provisions or the common law rules on frustration so as to avoid liability for what would otherwise be a breach of contract by virtue of Section 32 and Section 56 of Indian Contract Act, 1872. The impact of the COVID-19 outbreak on contracts largely depends on the term of the contract. In particular, whether the contract contains a force majeure clause and if it does, whether the COVID-19 outbreak could fall within the terms of that clause. Performance of the contract, including payments under the contract, is usually suspended during the period of the force majeure event. The ability to terminate the contract for a force majeure event may depend on the length of time that the event persists. At this stage it is unknown how long the current circumstances arising from the COVID-19 outbreak will last.
School of Law
Jagran Lakecity University,